Estonian wage growth adds to hard landing concerns

Rising wages, boosted by labor shortages during the economic boom from joining the EU in 2004, and an outflow of workers to wealthier member states are threatening to undermine the competitiveness of companies who ship their goods abroad. With domestic demand shrinking, export strength is a key issue, the central bank and the International Monetary Fund said this week.

"This is clearly not sustainable,'' Sander Klaos, an economist with Nordea AB in Tallinn, told Bloomberg, adding he had expected wage growth of close to 15 percent in the quarter. "It will probably take a year for wage growth to slow to, or even below, sustainable levels.''

An economic "hard landing'' is when fast growth spurs inflation, which in turn erodes consumers' buying power and quickly leads to a recession.

The inflation rate, which hit a 10-year high in April, and more conservative lending by banks have cut consumption and cooled the housing market, with economic expansion almost stalling to 0.4 pct annual growth in the first quarter, the slowest rate in the EU, compared with 4.8 pct in the fourth quarter and 10.1 pct a year earlier.

The Finance Ministry said it expected more of a slowdown in wage growth and that a delay in a wage correction could hurt the whole economy.

Wage growth in the central government sector rose 23.8 pct, and 25.9 pct in local governments, reflecting growth in teachers' salaries, Annika Paabut, an economist with AS Hansapank, said. Paabut said companies will be forced to significantly cut costs due to lower consumption, which will lead to lower wage growth and higher unemployment from the second half of the year.